Distributed Inventory Defined: How It Works & When to Use It

Distributed inventory, in which products are spread across warehouses or distribution centers across a strategic geography, is an increasingly popular approach to inventory management. By better syncing inventory location and demand, businesses can tackle some of their biggest inventory management and distribution challenges: getting the right volume of goods to the right places as quickly and cost-effectively as possible.

While distributed inventory was once limited to large manufacturers or retailers, growing businesses in a variety of industries are increasingly taking advantage of the approach as well. In the construction and building materials industry, for example, increased demand for flexible, just-in time (JIT) delivery to construction sites and prefabrication plants is driving increased adoption of distributed inventory approaches, in conjunction with better demand forecasting and inventory planning.

What Is Distributed Inventory?

Distributed inventory is a goods distribution strategy in which inventory is stored in and shipped from multiple fulfillment centers or warehouses located in different geographic areas. By contrast, centralized inventory is a distribution strategy in which companies maintain a single warehouse or center to manage everything that comes and goes.

Businesses typically require different types of inventory to keep their operations humming along. In addition to finished goods (products ready for sale), inventory may also refer to raw materials and components; products or parts needed for maintenance, repair and operations (MRO); and packing materials.

A “hub-and-spoke” model of inventory distribution lets companies keep their key supplies closer to where they are needed. Benefits include faster delivery, reduced shipping costs and greater inventory control — a win-win for both businesses and customers.

How Does Distributed Inventory Work?

In a traditional inventory model, a manufacturer or supplier houses its goods in a centralized warehouse. When a customer places an order, the order is prepared for delivery at the central location and is then sent to the customer. In a distributed inventory model, when a customer places an order, the warehouse or fulfillment center that is closest to that customer and has all items in stock or that can fulfill it at the lowest cost will prepare and ship it.

These fulfillment centers can also help others in the network when there is a sudden increase in demand for certain products. Companies may operate their own “captive” fulfillment centers, or they may contract with third-party providers that operate their own multi-warehouse networks.

When and Why Should a Business Use Distributed Inventory?

Customers across industries have come to expect fast, inexpensive delivery. By spreading inventory across multiple geographically dispersed warehouses or fulfillment centers, businesses are better positioned to meet those expectations cost-effectively, achieving a competitive advantage. There are a number of scenarios in which the distributed inventory model is especially effective.

1. Decrease cost of shipping: Companies that transport goods of substantial weight — like bags of cement, boxes of tiles or pieces of wood and pipes — spend a lot to deliver their products over long distances. They can see significant cost savings by spreading these goods across multiple distributed centers closer to their customers.

2. Shorten shipping times: Relying on historical or seasonal data can help forecast inventory needs, but unforeseen shifts in buying patterns and disruptions in the supply chain can wreak havoc. If the nearest location is out of stock, you can just pull from a secondary location to fulfill the order without incurring additional costs from replenishing and rushed shipping.

3. Safety stock: Newer or smaller companies may find a centralized warehouse approach meets their initial needs. But as sales grow, shipping costs are likely to grow while, too. In fact, shipping costs may quickly overtake the expense of adding distributed fulfillment centers; keeping inventory closer to customers reduces surging distribution expenses.

4. Serving a distributed customer base: When a company’s customers aren’t located in a single geographic area, a distributed inventory approach allows them to fulfill orders faster and at a lower cost than if they had to be shipped from one place. This is particularly important as cross-border, global transactions increase.

How to Choose Fulfillment Centers

Companies should be strategic in their selection of fulfillment centers in order to maximize the potential benefits of a distributed inventory approach. First, they must determine where their customers are and which items are in highest demand. Then they can position the right products in the best locations. For example, a building products manufacturer would locate its inventory nearest cities with significant construction activity and customers, and make sure its most popular and/or hardest-to-transport items are held in stock there. The closer the inventory is to the customer, the more likely the business will be able to deliver goods quickly and via the least expensive means. A business may also be able to promise one- or two-day delivery.

Some businesses find it expedient to partner with a third-party logistics provider (3PL) that already manages multiple dispersed warehouses. Doing so can reduce the upfront costs associated with setting up their own captive warehouses or fulfillment centers and allow the business to take advantage of the partner’s knowledge and experience. In ecommerce, for example, companies might opt to partner with third-party logistics companies — or even much larger sellers, like Amazon or Walmart, to tap into their inventory placement services for distributed inventory management and fulfillment in order to offer faster shipping and consistent service.

Types of Distributed Inventory Approaches

Companies must also consider how decisions are made in a distributed inventory environment. They may opt for a centralized or decentralized approach.

• Centralized distributed inventory: In a centralized distributed inventory approach, a decision-maker or team at the highest level, perhaps at company headquarters, decides how much inventory is allocated to the various fulfillment centers or warehouses. In other words, decisions are made from a single point.

• Decentralized distributed inventory: In a decentralized distributed inventory approach, inventory-related decisions are made at the local level — in other words, at each fulfillment center. It's crucial that individual decision-makers have access to data about customer and product demand for this approach to be successful.

8 Benefits of Distributed Inventory

A distributed inventory model offers many potential business advantages. The benefits can be both tactical and strategic, with positive impacts on both a business’s profitability and customer satisfaction.

1. Increased order fulfillment capacity: Often, a company can process and fulfill more orders when processes are distributed across multiple facilities. In addition, companies using a distributed inventory strategy don’t necessarily have to determine how to ship a growing number of orders. They can collaborate with third-party logistics providers to determine how best to expand and handle that volume.
2. New market expansion opportunities: The ability to ship more products less expensively by way of new locations can help a business expand into new markets. Ideally, you would have set up a distribution center before pursuing sales in the area.
3. Better inventory control (less surplus): When coupled with an understanding of product demand and customer location, organizations that stock their distributed warehouses can more effectively manage the inventory in their buildings. That allows them to operate with less surplus inventory than those that take a centralized approach.
4. Reduced transportation and shipping costs: In a distributed inventory environment, goods are located closer to customers, reducing transportation costs. This is particularly important for oversize and overweight products that are expensive to ship longer distances. Some of these savings can be passed along to customers in the form of lower-cost (or even free) shipping or retained as profits.
5. Faster delivery (happier customers): Not surprisingly, businesses that follow a distributed approach to inventory can shorten the time it takes to get products to customers — another way to boost customer satisfaction.
6. Reduced damage and loss: Because products do not have to travel as far, they are less likely to be damaged or disappear in transit. That leads to savings for the company responsible for those products.
7. Easier reverse logistics (returns): When a customer wants to return a product, a business has to manage the process of putting the goods back in stock or throwing them out. Those that use their distributed warehouses to accommodate these reverse logistics processes can lower the related cost and effort. The ultimate goal is to be able to accept returns anywhere.
8. Fewer cross-border deliveries: International marketplaces present a huge opportunity for sellers, but shipping across national borders poses several challenges, from increased costs to customs concerns. Working with local warehouses or fulfillment centers can effectively reduce or eliminate those issues.

Challenges of Distributed Inventory

Despite the many advantages of a distributed inventory model, companies should be aware of a few downsides. Cost is one, especially for young companies that want to grow their business. Whether investing in additional fulfillment centers or working with third-party logistics providers, more locations often mean more overhead. Companies that decide to adopt this approach must also have strong demand forecasting skills to ensure it is financially beneficial.

Management is another factor to consider. Some businesses may need to work with multiple 3PLs, which can increase the complexity of partner and customer relationship management. It may also require the company to use different technology, such as order management systems, when working with different providers. Communication and shared performance metrics are critical to success and should minimize those issues.

Finally, it can be difficult for companies to overcome inventory management challenges and have all the inventory intelligence that underpins a successful distributed inventory environment. It requires strong demand planning and supply chain analysis capabilities — even when working with 3PLs — to avoid carrying too much or too little stock.

Manage Distributed Inventory With Inventory Management Software

In the modern marketplace, advanced inventory management is a competitive differentiator for companies seeking to improve customer experiences. Adopting a distributed inventory approach may prove to be the key. An inventory management solution with order management capabilities can help businesses manage this more complex distributed approach. It can ensure enough inventory is on hand in the right locations to meet demand, leading to reliable, fast and low-cost delivery. Leading inventory management software also eases inventory tracking across multiple locations, automates processes, such as replenishment and facilitates demand forecasting.

Taking a traditional approach to supply chain management and inventory management makes it difficult — sometimes even impossible — to meet increasing customer demands for just-in-time delivery, flexibility and product availability across channels. A distributed inventory strategy and system for shipping orders from multiple warehouses across a range of geographic regions can result in tighter inventory control, reduced delivery times and shipping costs, and a better customer experience.